Amara - How long?
Dear all,
Please find our updated analysis of Amara here.
If Amara were a boat with a heading, it would look like a reasonable proposition. There is nothing valuable on the boat; it has no assets, and it’s likely a nervous ride, but it should sail. The problem we have is not so much with the boat as with the heading. Amara is fighting a tide, and it’s only just going out. Across Europe, energy investments are coming down in a double whammy of electricity prices falling from their Ukraine war highs and, as regards renewables, countries no longer adhering to the Paris Climate Accord. We think this lull could last as long as the Trump administration, and that’s longer than Amara has.
Investment Rationale:
- We are toying with the idea of dipping our toes in Amara, but so far it is still akin of catching a falling knife. Even though renewables are generally a growth sector, this sector is volatile. However, after the bonds dropped in the wake of tariffs, we are no longer considering this name from the short side.
- The bonds are priced somewhere between recovery value and EV and offer a good chance of a par refinancing if performance recovers only half as fast as it dropped. However, we are not sure the European renewables market has already bottomed out. Energy price reductions and the pause of the Paris Accord combine to a very unfavourable climate for the sector as we read of project cancellations, investment reductions, growth rate slowdowns and incentive terminations wherever we look. The slow global macro outlook suggests this will not turn around quickly.
- So Amara feels like a reasonable boat, but one that has to fight the tide. We'll watch the tide and reconsider again in due course.
Tariffs:
- Rerouting Solar Panels to Europe: Management sees little danger. Chinese panel penetration of the US market is low, and the largest Chinese suppliers have set up local production since being hit with 30% tariffs under the first Trump administration. Enphase have 80% market share in Inverters. Amara are working with big panel suppliers, and the indication so far is that they will not vastly increase supply to Europe. If that were to happen, prices would have already dropped (in fact they have. Do not expect a decrease in solar prices in the next months. Italian prices have returned from €120 to €133 per MW by the end of Q125.
- US Wind segment: Contains mostly US products. Management will monitor Resi and CMI markets for volume reactions to the higher import prices. Much of the after-market supply comes from outside the US so far.
Mexican Accounting:
- We are not too concerned. The incident took place in a subsidiary of limited overall size.
- Generated non-existent 4.5m of EBITDA. No Cash impact in 2024 and approx. €1.5m of 2023 EBITDA. 2023 accounts will not be restated as the amount is deemed immaterial. From the comparables presented in the unaudited 2024 accounts, the majority of the 2023 impact was in Q423. Again, there was no cash impact.
- Cinven have reacted. Local line management has been dismissed, and a big four accounting firm has been hired.
- Because quarters 1-3 2024 have been inflated, Q4 looks worse than it was. We have adjusted the prior three quarters (where possible) to gain a more accurate picture of Amara's Q4 performance (which was disappointing all the same).
- We are inclined to overlook this episode.
Turnaround Plan:
- FY25 to be at least Net Cash Flow break-even. The plan foresees the majority to be achieved through cost cuts and a minority to come from further inventory liquidation. Because FY24 EBITDA + plus in-year savings (€19.2m) from the cost savings program below (€26m) already equal €50m EBITDA, and any WC gains are supersede to be the minority (less than €19.2m) underlying EBITDA for FY25 must not fall by more than €20m or else Amara miss their plan.
- WC: Moving from 80+ days of inventory to 60 days. So year-end inventory should come from €120m to €90m.
- FY24 Normalised EBITDA would have been more than €50m (adjusted for annual savings of €19.2m).
- Cost: The plan is to decrease OpEx by €19.3m this year for a run-rate of €26m from year-end onwards.
- Of the €19.2m OpEx savings, €8.4m have been implemented so far, and €2m of expenses have been discontinued. Once all of the program is implemented, and provided 2025 EBITDA is still at the same 2024 level, then FY25 Pro Forma EBITDA will theoretically be shown as ~€50m.
- In Q125, Savings from the €19.2m program will be limited. Savings should become visible from Q225 onwards.
Here to discuss this name with you,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk